Tata Motors vs M&M: Which auto major should you pick for the long term?

Auto space has witnessed a strong outperformance this year as well as in the last 1 year on the back of significant volume expansion and enhanced operational efficiency.

During Q3FY24 as well automotive companies witnessed favorable year-on-year volume growth across various segments. This growth in volume was complemented by improved realization, supported by premiumization strategies and enhanced net pricing. Moreover, the margin performance was bolstered by a favorable product mix and advantages stemming from the easing of commodity prices.

Amid this positive environment, let's analyse between Tata Motors and Mahindra & Mahindra (M&M), which auto stock has better long-term investment opportunities.

Read here: Lok Sabha polls 2024 and Indian stock market: IT, Auto among top 5 picks for this season

Stock Price Trend

Tata Motors has outperformed benchmark Nifty Auto this year so far as well as is the better performer between the two. Tata Motors has risen 2 percent in 2024 YTD while M&M is up just 7.5 percent. In comparison, the Nifty Auto index has gained 11.5 percent in this period.

This year so far, Tata Motors has given positive returns in all 3 months so far while M&M has been positive for just 1. Tata Motors rose 1.4 percent in March so far, extending gains for the fifth straight month since November 2023. Between November and March, it has surged over 53 percent. Meanwhile, it jumped 7.4 percent in February and 13.4 percent in January 2024.

M&M, on the other hand, has shed 3 percent in March so far after a 16.6 percent rally in February. It was also over 4 percent down in January 2024.

Read here: Nifty Auto outperforms with 10% YTD gains; Time to remain careful, say analysts

Meanwhile, in the last 1 year as well, Tata Motors is the better stock. It has given multibagger returns, soaring 129 percent whereas M&M has risen almost 60 percent. In comparison, Nifty Auto has surged over 70 percent in this time.

Both Tata Motors and M&M have also hit their record highs in the current month, March. Tata Motors hit its new peak of ₹1,065.60 on March 5, 2024. Currently trading at ₹964.85, it is over 9 percent away from its peak. However, it has advanced 141 percent from its 52-week low of ₹400.40, hit on March 28, 2023.

Meanwhile, M&M also touched its all-time high of ₹1982.30 on March 1, 2024, and is currently around 6 percent away from peak. Currently trading at ₹1867.60, it has gained over 66 percent from its 52-week low of ₹1,124, hit on March 28, 2023.

Read here: Apollo Tyres jump over 58% in 1 year; should you still buy?

Moreover, in the long term, 3 years, again Tata Motors has emerged as the winner. Both stocks have given multibagger with Tata Motors up 212 percent and M&M up 120 percent.

Earnings

In the quarter ended December 2023, Tata Motors, India's most valuable carmaker, beat Street estimates as it reported a more than two-fold increase in net profit driven by strong sales in its British luxury car unit, Jaguar Land Rover (JLR). Tata Motors’ consolidated net profit surged 137.5 percent to rs 7,025.11 crore in Q3FY24, compared to ₹2,958 crore in the year-ago period. Its total revenue from operations in the third quarter of FY24 rose 25 percent to ₹1,10,577 crore from ₹88,488.59 crore, YoY, led by JLR sales which rose 27 percent in the period.

Earlier this month, the auto major also announced a demerger of its commercial and passenger vehicle segments into two distinct listed entities. This move aims to enhance the company's ability to capitalize on growth opportunities effectively.

Read here: SBI vs Bank of Baroda: Which PSU bank stock should you pick for long term?

On the other hand, in Q3FY24, Mahindra and Mahindra reported a consolidated net profit of ₹2,658.40 crore, mildly lower than a profit of ₹2,676.56 crore in the same quarter last year. Its total income from operations, on a consolidated basis, for the quarter under review rose over 15 percent to ₹35,299.39 crore as against ₹30,621.28 crore year-on-year (YoY).

However, the company's standalone PAT (profit after tax) for the quarter under review surged almost 61 percent YoY to ₹2,453.98 crore against ₹1,528.06 crore in Q3FY23, whereas its standalone revenue from operations stood at ₹25,288.51 crore for Q3FY24, up 17 percent against ₹21,653.74 crore YoY.

Read here: Godrej Properties vs DLF: Which realty stock should you pick for long term?

Which auto major has better long-term investment opportunities?

Akshay Karwa, Research Analyst, Anand Rathi Institutional Equities likes M&M over Tata Motors

M&M's strategic initiatives, such as expanding its EV lineup and leveraging partnerships (VW), position it well for growth and market leadership in the PV space, particularly in the burgeoning electric vehicle segment.

1) M&M's Healthy Order Book: M&M has a healthy order book of 226,000 units, with a booking rate of approximately 50,000 units per month. This indicates strong demand for their products.

2) Market Share Gain in PV Space: With such a robust order book and high booking rate, M&M is poised to gain market share in the Passenger Vehicle (PV) space. Their growth projections indicate a significant outperformance compared to the industry average, with volumes expected to grow in the high mid-teens against an industry growth rate pegged at around 5 percent.

3) New EV SUVs Launch: M&M plans to launch five new Electric Vehicle (EV) SUVs by December 2024. These SUVs will be based on their new electric platform, INGLO. Leveraging components from VW indicates a strategy, which would provide M&M with access to advanced technology and expertise in the EV segment.

Read here: ITC vs HUL: Which FMCG stock should you pick for long term?

Motilal Oswal, as well, is more bullish on M&M

While the brokerage has downgraded Tata Motors post the demerger news, it has an 'add' call on M&M. For Tata Motors, MOSL has a target price of ₹1,000, implying a just 3.6 percent upside, whereas for M&M, it'a target is ₹2,005, indicating an over 7 percent upside potential.

"Tata Motors (TTMT) has announced the demerger of its business verticals into two separate listed companies. While the demerger seems to be a step in the right direction, we do not foresee any need to revisit our target price, which is already based on SoTP valuation. Moreover, despite factoring in most of the positive triggers in our estimates, we get limited upside given the recent sharp run-up in the stock," said MOSL.

For M&M, MOSL noted that M&M’s auto business is expected to be the key growth driver for the next couple of years on the back of its healthy order backlog and new launches.

"The near-term outlook for tractors remains weak, but we expect tractor demand to revive to mid-single digit growth amid favourable indicators. We estimate a CAGR of nearly 12 percent, 15 percent and 16 percent in revenue, EBITDA, and PAT, respectively, over FY23-26," it stated.

Read here: Nifty FMCG vs Nifty Finance: Which sector is better for long-term investment?

Nuvama Wealth Management also prefers M&M better

The brokerage has maintained a 'buy' call on M&M and raised the target price to ₹2,080, implying an over 11 percent upside potential.

It foresees a consistent revenue and core earnings Compound Annual Growth Rate (CAGR) of 13 percent and 18 percent respectively throughout FY23–26E, with an anticipated sustained Return on Invested Capital (RoIC) exceeding 35 percent. Notable catalysts for the stock are expected to include production ramp-up initiatives and additional announcements related to Electric Vehicles (EVs), it added.

Meanwhile, it downgraded Tata Motors to 'Hold,' with a target price of ₹960, citing limited upside potential and a moderating volume outlook.

Read here: Nifty Auto vs Nifty Realty: Which sector is a better bet for long term?

According to Nuvama Institutional Equities, Tata Motors' recent decision to separate its commercial vehicle and passenger vehicles businesses into two distinct entities is deemed a "non-event" in the immediate term. The brokerage firm suggests that the entire process of separation could span approximately 15 months to finalize. Drawing a parallel, the firm likens this move to JIO's recent demerger from Reliance Industries Limited, wherein JIO was listed separately and subsequently excluded from domestic indices in the following days. 

Presently, Tata Motors holds membership in all passive indices. However, once the demerger is successfully completed, the smaller entity (CV business) evolving into a standalone entity would lead to its exit from both the Nifty 50 and Sensex indices.

Overall, the consensus among analysts leans towards M&M for better long-term investment opportunities in the automotive sector.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.